Improving value for money on SANRAL's toll operations contracts

Abstract:

The South African National Roads Agency Ltd (SANRAL) is the custodian
of the 9 208km national road network in South Africa. SANRAL's
mandate is to develop, maintain and operate this national economic
asset. 26,3°/o of the national road network consists of toll roads. The
operation and maintenance of the toll facilities are let by SANRAL
through a public open tender process. The successful tenderer is then
appointed by SANRAL on a contract basis as the toll road operator.
The operation and management of toll facilities involve various technical
and managerial disciplines, such as electrical, mechanical and civil
engineering, toll collection, and operations management. Historically,
toll operations contracts were fragmented into separate sub-contracts
for each of the disciplines. This resulted in a substantial amount of
project management input from SANRAL. In addition to SANRAL's high
level of management input, it also carried the risk of fraud. SANRAL
had no incentives for a toll operator to increase the toll revenues,
neither did it impose any penalties for poor performance.
In order to simplify the project structure, as well as to improve on the
old toll contract format, SANRAL developed a new toll operations
contract model, aptly named Comprehensive Toll Road Operations and
Maintenance or CTROM (C-T -ROM). Amongst others, the benefits of the
new contract format are:
• That it simplifies SANRAL's management input by providing a
single point of contact between SANRAL and a principal toll
operator, under whose supervision all the sub-contractors reside.
The toll operator therefore assumes the responsibility and
accountability to manage the sub-contractors.
• The introduction of penalties that are imposed on the toll
operator, should he not perform his contractually specified duties
and obligations.
• The transfer of fraud risk to the toll operator.
• An increase in the toll revenue by offering the toll operator a
revenue-sharing incentive.
The first contracts let under the CTROM format were the N2 North Coast
Toll Road and the N2 South Coast Toll Road in July 2001. As these toll
routes had been in operation for a while before the CTROM contracts
were procured, comparisons could be made on the pre-CTROM and
post-CTROM costs. Initial indications were, although there were some
structural differences between the old and the new format, that these
two CTROM contracts were between 7 and 13°/o more expensive than
their predecessors. An extrapolation of these values to all the current
CTROM contracts results in additional costs to SANRAL of between
R 10m and R 20m per annum, when compared to the previously used
managed contract format.
The more expensive CTROM contracts have brought about significant
benefits, such as the tra'nsfer of fraud risk from SANRAL to the toll
operator, as well as a simpler project structure in the form of a single
point of responsibility. The intention of this research report is to
determine whether the increase in cost has been worthwhile, and
whether there are areas for further improvement. In other words, are
the more expensive CTROM contracts providing SANRAL with an
associated increase in value for its money? Not only is SANRAL
concerned with the prudential expenditure of its toll revenues, but it is
also under legislated obligations to ensure that funds are spent in the
most appropriate and efficient ways.
In order to better understand value for money and related concepts, the
author explores various academic theories in the form of a literature
study. By building a platform from which to conduct further analyses,
the author can then apply the newly found knowledge to test the
hypothesis that SANRAL is not achieving optimal value for money on its
CTROM contracts.
Concepts and theories that are studied in the literature review include:
• The legislative and institutional framework; and
• Key terminology such as risk management, the public sector
comparator, value for money, and performance penalties on
contracts.
Many of the concepts have been explored worldwide, especially in
developed countries such as Australia, Canada, Hong Kong and the
United Kingdom, where those countries' governments actively
encourage private sector investment in public infrastructure.
In the analytical part of the research report, the author explores the
causes of the additional costs on two of SANRAL's toll routes, namely:
• The Mariannhill Toll Route, which is located on the N3 between
Pinetown and Key Ridge in the province of KwaZulu-Natal; and
• The N 17 Toll Route between Springs and Wemmer Pan in the
province of Gauteng.
The analyses suggest that the operations and maintenance (O&M) costs
of the N3 Mariannhill and N 17 toll routes under the CTROM contracts are
46,3°/o and 20,4°/o more expensive than on the previous contracts.
Some of the factors that could play a role in the increased cost of the
CTROM contracts are:
• The contract duration;
• Risk transfer to the toll operator;
• Penalties applied when the toll operator does not conform to the
required specifications; and
• Complex performance specifications.
University of Pretoria
Graduate School of Management
MBA Research Report RPJ820 v
P Suremann
91052719
October 2004
Digitised by the University of Pretoria, Library Services, 2014
The author concludes that there are a number of factors that negatively
influence the cost of the CTROM contracts. The author therefore
recommends that the factors that are within the control of SANRAL be
changed. These improvements should bring about better value for
money on SANRAL's toll operations contracts.